Notes by Praveen B S

Law of taxation notes

UNIT I

1. Explain the term ‘Tax’ and state the different types of taxes?(Dec
21)(Dec 19) 10 Marks

A tax may be defined as a "pecuniary burden laid upon individuals or

property owners to support the government or a payment exacted by
legislative authority.

A tax "is not a voluntary payment or donation, but an enforced

contribution, exacted pursuant to legislative authority" and is "any
contribution imposed by government whether under the name of toll, tribute,
impost, duty, custom, excise, subsidy, aid, supply, or other name.

Types of taxation:

Personal income tax is often collected on a pay-as-you-earn basis, with small

corrections made soon after the end of the tax year. These corrections take one
of two forms: payments to the government, for taxpayers who have not paid
enough during the tax year; and tax refunds from the government for those
who have overpaid. Income tax systems will often have deductions available
that lessen the total tax liability by reducing total taxable income. They may
allow losses from one type of income to be counted against another. For
example, a loss on the stock market may be deducted against taxes paid on
wages. Other tax systems may isolate the loss, such that business losses can
only be deducted against business tax by carrying forward the loss to later tax
years.

Classification of Taxes.

Broadly taxes are divided into two categories:

1. Direct Taxes

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Notes by Praveen B S

2. Indirect Taxes

Direct Taxes
A direct tax can be defined as a tax that is paid directly by an individual
or organization to the imposing entity (generally government). A direct tax
cannot be shifted to another individual or entity. The individual or
organization upon which the tax is levied is responsible for the fulfilment of
the tax payment.
The Central Board of Direct Taxes deals with matters related to levying
and collecting Direct Taxes and formulation of various policies related to
direct taxes.
A taxpayer pays a direct tax to a government for different purposes,
including real property tax, personal property tax, income tax or taxes on
assets, FBT, Gift Tax, Capital Gains Tax, etc.
Indirect Taxes
The term indirect tax has more than one meaning. In the colloquial
sense, an indirect tax such as sales tax, a specific tax, value-added tax (VAT),
or goods and services tax (GST) is a tax collected by an intermediary (such as
a retail store) from the person who bears the ultimate economic burden of the
tax (such as the consumer).
The intermediary later files a tax return and forwards the tax proceeds
to the government with the return. In this sense, the term indirect tax is
contrasted with a direct tax which is collected directly by the government from
the persons (legal or natural) on which it is imposed.

Sales tax:
A tax levied for the sale of a product is called a sales tax. This tax is
levied on a product’s seller, who then passes the price to the buyer, with the

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Notes by Praveen B S

tax included in the product’s price. Sales tax can be applicable on three
different levels:
 Inter-State sale
 Sale during import/export

 Intra-state level

Service tax:

Like sales tax, this tax is also included in the price of a product sold in
the country. It is levied on the services that a company offers. They are
collected depending on the way these services are offered. It covers all the
paid services, including telephone, healthcare, maintenance, consultancy,
banking, financial services, advertising, etc.

Excise duty:
Excise duty is the tax imposed on produced goods or goods in India.
It is collected directly from the manufacturer of the goods. They are also
collected from entities that receive goods and work for the individuals to
ship the products.

Customs Duty:
Customs duty is the charge levied on any product that has been
imported from abroad. It ensures the goods entering the country are taxed
and paid for. The rate of taxation depends on the nature of the product.

Goods & Services Tax:

Before the Goods and Services Tax was introduced, there were
numerous types of tax in India.

GST is an indirect tax that has clubbed together many indirect taxes
in India, like excise duty, VAT, service tax, etc. This is the tax levied on
the supply of services and goods sold for domestic consumption in India.

GST is considered a multi-stage comprehensive tax levied as per

the destination on the value addition. The tax is levied on the consumers

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Notes by Praveen B S

buying goods or services. However, the responsibility of remitting tax to

the government lies on the seller/provider of the goods and services.

Here is how the GST works:

 Manufacturer: The manufacturer has to pay GST on the raw

material purchased for the product.

 Service Provider: The service provider has to pay GST on the

product’s amount.

 Retailer: A retailer purchases the product from the distributor,

adding a margin. However, the retailer’s price can be reduced
from the overall GST.

 Consumer: The consumer who obtains the product has to pay the
suitable GST on the product.

Classification of taxes in India for GST

CGST - Central Goods and Services Tax

The revenue earned from CGST is collected by the Central
Government and applies to intrastate transactions (within the same state).

SGST - State Goods and Services Tax

SGST refers to the State Goods and Services Tax. It is the tax that
the state government levies on intra-state transactions of goods and
services. UGST, or Union Territories Goods and Services Tax, replaces
SGST in Union Territories like Andaman and Nicobar Island or
Chandigarh.

IGST - Integrated Goods and Services Tax

The Integrated Goods and Services Tax is applied to the interstate
(between 2 states) supply of goods and services. It is also applicable for
imports and exports.

Direct taxes are levied on income and profits, while indirect taxes
are applied to goods and services. Paying taxes on time is crucial to foster
a nation’s economic growth and development.

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Notes by Praveen B S

The Indian tax structure is framed so that all indices of ability to

pay are taxed. The direct tax is framed so that as the tax base increases,
the tax rate also rises sharply. Excise duties are levied and collected in
different ways based on the type of commodity and the consumer class.

2.Discuss the provisions relating to taxing powers under the Indian

Constitution. (Mar 21)(Oct 21)(Apr 22) 10 Marks

OR
3Write a note on Centre-State tax relationships. (Mar 21) 6Marks

OR

4Write a note on delegation of taxing power to state legislature and local

Bodies?(Oct 21)(6marks)

Introduction

The system of taxation is the backbone of a nation’s economy which

keeps revenue consistent, manages growth in the economy, and fuels its
industrial activity. India’s three-tier federal structure consists of Union
Government, the State Governments, and the Local Bodies which are
empowered with the responsibility of the different taxes and duties, which are
applicable in the country. The local bodies would include local councils and
the municipalities. The government of India is authorized to levy taxes on
individuals and organisations according to the Constitution.

Power to levy and collect taxes whether, direct or indirect emerges from the
Constitution of India. In case any tax law, be it an act, rule, notification or
order is not in conformity with the Constitution, it is called ultra vires the
Constitution and is illegal and void.

Taxation power of union and state government

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Notes by Praveen B S

Article 246 of the Constitution deals with the division of powers between
Union and State Governments. It provides for the division of power into three
lists, namely, Union List, State List, and Concurrent List. Union List-

Union List- Article 246(1) of the Indian Constitution states that Parliament
has exclusive power to make laws with respect to any of the matters
enumerated in List I in the Seventh Schedule.

Article 245: Part XI of the Constitution deals with relationship between the
Union and States. The power for enacting the laws is conferred on the
Parliament and on the Legislature of a State by Article 245 of the Constitution.
The said Article provides as under:

a. Subject to the provisions of this Constitution, Parliament may make laws

for the whole or any part of the territory of India, and the legislature of a
State may make laws for the whole or any part of the State.

b. No law made by the Parliament shall be deemed to be invalid on the ground

that it would have extra-territorial operation.

Seventh Schedule to Article 246: It contains three lists which enumerate the
matters under which the Union and the State Governments have the authority
to make laws.

UNION LIST: It contains the matters in respect of which the Parliament

(Central Government) has the exclusive right to make laws.

STATE LIST: It contains the matters in respect of which the State

Government has the exclusive right to make laws.

CONCURRENT LIST: It contains the matters in respect of which both the

Central & State Governments have power to make laws.

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Notes by Praveen B S

The constitutional provisions related to taxation.

The authority to levy a tax is derived from the Constitution of India

which allocates the power to levy various taxes between the Centre and the
States.

The Article 265 of the Constitution states that “No tax shall be levied or
collected except by the authority of law”. Therefore, each tax levied or
collected has to be backed by an accompanying law, passed either by the
Parliament or the State Legislature.

The Article 266 states that all the government revenue generated from taxes,
asset sale, earnings from state-run companies, etc. goes into the Consolidated
fund of India. The fund gets money from:

 Revenue earned indirect taxes such as income tax, corporate tax, etc.
 Revenue earned in indirect taxes such as GST.
 Dividends and profits from PSUs

Provided that no money can be withdrawn from the Consolidated Fund of

India, without the government securing the approval of the Parliament.

Article 268 of the Constitution of India states that stamp duties covered in
Union List shall be levied by the Government of India but collected by States.

Article 269 of the Constitution of India enumerates taxes and duties which are
levied and collected by the Government of India but assigned to States. This
cover:

 Tax on sale or purchase of goods in inter-state trade or commerce.

 Tax on consignment of goods in inter-state trade or commerce.

Article 269(A)

This article is newly inserted which gives the power of collection of GST on
inter-state trade or commerce to the Government of India i.e. the Centre and

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Notes by Praveen B S

is named IGST by the Model Draft Law. But out of all the collecting by
Centre, there are two ways within which states get their share out of such
collection

1. Direct Apportionment (let say outs of total net proceeds 42% is directly
apportioned to states).

2. Through the Consolidated Fund of India (CFI). Out of the whole amount
in CFI a selected prescribed percentage goes to the States.

Article 270 of the Constitution of India provides that net proceeds of all taxes
and duties referred to in Union List, except the specified taxes, shall be levied
and collected by Centre and shall be distributed between Centre and States.
Thus, revenue from taxes like income tax and Central Excise are distributed
between Centre and states as per the recommendation of finance commission,
which is constituted under Article 280 of Constitution of India.

Article 271

The collection of the surcharge is also done by the Union and the State
has no role to play in it.

In the case of m/s SRD Nutrients Private Limited v. Commissioner of Central

Excise, Guwahati, the Supreme Court was presented with the question: If on
excisable goods an education cess can be levied before the imposition of cess
on goods manufactured but cleared after imposition of such cess. The
judgement given in this case was in favour of the manufacturer but the judges,
Justice A K Sikri and Justice Ashok Bhushan observed that education and
higher education cess are surcharges.

Article 273

This grant is charged to the Consolidated Fund of India every year in

place of any share of the net proceeds, export duty on products of jute to the
states of Assam, Bihar, Orissa, and West Bengal. This grant will continue and

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Notes by Praveen B S

will be charged to the Consolidated Fund of India as long as the Union

government continues to levy export duty on jute, or products of jute or the
time of expiration which is 10 years from its commencement.

Article 275

These grants are sanctioned as the parliament by law decides to give to

those states which are in dire need of funds and assistance in procuring these
funds. These funds /grants are mainly used for the development of the state
and for the widening of the welfare measures/schemes undertaken by the state
government. It is also used for social welfare work for the Scheduled tribes in
their areas.

Article 276

This article talks about the taxes that are levied by the state government,
governed by the state government and the taxes are collected also by the state
government. But the taxes levied are not uniform across the different states
and may vary. These are sales tax and VAT, professional tax and stamp duty
to name a few.

Article 277

Except for cesses, fees, duties or taxes which were levied immediately
before the commencement of the constitution by any municipality or other
local body for the purposes of the State, despite being mentioned in the Union
List can continue to be levied and applied for the same purposes until a new
law contradicting it has been passed by the parliament.

In the case Hyderabad Chemical and Pharmaceutical Works Ltd. v.

State of Andhra Pradesh, the appellant was manufacturing medicines for
making which they had to use alcohol, the licenses for which were procured
under the Hyderabad Abkari Act and had to pay some fees to the State
Government for the supervision. But the parliament passed the Medicinal and

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Notes by Praveen B S

Toilet Preparations Act, 1955 under which no fee had to be paid but the
petitioner challenged the levy of taxes by the state after the passing of the
Medicinal and Toilet Preparations Act, 1955 because according to Article 277,
entry 84 of list 1 in the 7th schedule, the state could not levy any fee. The
difference between tax and fee was explained. Proceeds from tax collection
are used for the benefit of all the taxpayers but a fee collected is used only for
a specific purpose.
Article 279
This article deals with the calculation of “net proceeds” etc. Here ‘net
proceeds’ means the proceeds which are left after deducting the cost of
collection of the tax, ascertained and certified by the Comptroller and Auditor-
General of India.
Article 280 Provision has been made for the constitution of a Finance
Commission to recommend to the President certain measures for the
distribution of financial resources between the Union and the States
Conclusion: India is a big country with people belonging to different
communities and different wealth groups and income. Taxation to all cannot
be the same. This is the reason for the tax system in India being a complicated
one for long. After the implementation of the GST which is an all-inclusive
indirect tax, the process has become smoother and helped prevent the
cascading effect it had earlier.

5. “The law of taxation is levied in conformity with the fundamental

rights under Indian Constitution”. Discuss? (Dec 19)

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Notes by Praveen B S

INTRODUCTION: - A taxing statute must pass the test of

fundamental rights and the charge of discrimination. In order that the
law (imposing tax) to be valid, the tax must be within the legislature
competence (Art. 265) and secondly, the tax must be subject to the
conditions laid down in Art. 13 of the Constitution of India. One
such condition envisaged by Art. 13(2) of the Constitution of India
i s that " The State shall not make any law which takes away or
abridges the rights conferred by this Part and any l aw m a d e i n
contravention of this clause shall, to the extent of the
contravention, be void." Thus, the legislature shall not make any
law which takes away or abridge the equality clause of Art. 14 , i .
e., " The State shall not deny to any person equality before the law
or the equal protection of the laws within the territory of India."
The guarantee of equal protection of the laws must be extended
to taxing statutes.

Article 14 of the Constitution of India, does not mean that

every person should be t axed equally. But it does not mean that
i f property of the same character has to be t axed, the taxation must
be of the same standard, so that the burden of taxation may fall
equally on all persons holding that kind and extent of property. It
is common ground that the tax has no reference to income, either
actual or potential, from the property sought to be taxed. Hence, it
may be rightly remarked that the Act obliges every person who holds
land to pay the tax at the flat rate prescribed whether or not he makes
any income out of the property or whether or not the property is
capable of yielding any income. It is clear, therefore, that inequity is
inherent in the very provision of the taxation. It is one of those cases
where lack of classification creates inequality.

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Notes by Praveen B S

What the court has to see is the time and actual effect of the law,
as a law appearing to be discriminatory may not be so in operation. In
the case of State of Andhra Pradesh v. Raja Reddi , land revenue
was imposed at a flat rate on land without taking into account the
productivity of the soil. In the case of Moopil Nair , there was
no proper procedure laid down for assessment and collection.
The Supreme Court held that Article 14 of the Constitution of
India is violated in both the cases when a statutory provision
finds differences where there are none or makes no difference where
there is one.

The state has wide power in selecting persons or objects it will

tax and a statute is not open to attack on the ground that it taxes
some persons and subjects and not others. But it does not mean the
a taxation law can claim immunity from the equality clause in Art.
14 of the Constitution of India. It has to pass like any other law the
equality test laid in Art. 14 of the Constitution of India. But it must
be remembered the constitution of India. But it must be remembered
the state has in view of the intrinsic complexity of fiscal adjustment
of diverse elements, a considerable wide discretion in the matter of
classification for taxing purposes. The legislature has ample
freedom to select and classify persons, districts, goods,
properties, income and objects which it would tax, and and which
would not tax. S o l on g as the classification, made within the wide
and flexible range by a taxing statute does not transgress the
fundamental principles underlying the doctrine of equality, it is not
objectionable on the ground of discrimination merely because it taxes
or exempts from tax some income or objects and not others. Nor

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Notes by Praveen B S

the mere fact that a tax falls more heavily on some in the same
category, is by itself a ground to render the law invalid. It is only
when within the range of its selection, the law operates unequally
and cannot be justified on the basis of a valid classification that
there would be violation of Art. 14 of the Constitution of India.
A taxation will be struck down as violation of Art 14 of the Constitution
of India, if there is reasonable basis behind the classification made by it or if
the same class of property, similarly situated is subject to unequal taxation.
This requirement does not preclude the classification of property. Trades,
profession, and events for taxation subjecting one kind t o one r a t e of
taxation, and another t o a different rate. Perfect equality in taxation is
impossible and unattainable.

In E.I. Tobacco Co. v. State of A.P ., sales tax on Virginia

tobacco but not on country tobacco has been held to be valid. In
Western Indian Theatre v. Cantonment Board, a higher tax on
—
cinema- house containing large seating a c co mmoda ti on and
situated in f ashi onable and busy localities where the number of
visitors are more numerous, than the tax imposed on smaller
cinema- house containing less accommodation and situated in a
locality where visitors are poor and less numerous was held not
to be violative of the equal protection clause of Art. 14 of the
constitution of India. The classification was based on income of
cinema=house.

In. Indian Express Newspaper v. Union of India , it has been

held that the classification of news papers into small, medium and
big newspapers on the basis of their circulation for the purpose of
levying customs duty on newsprint is not violative of Art. 14 of the
Constitution of India. The object of exempting all small newspapers

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Notes by Praveen B S

from payment of customs duty while levying full customs duty on

big newspapers is to Assist the small and medium newspaper in
bringing down their cost of production. Such papers do not command
large advertisement revenue.

ARTICLE 19 ( 1 )( G) OF THE CONSTITUTION OF

INDIA. A tax, if not levied through a valid law, would be an
illegal impost and would constitute an unreasonable restriction on a
citizen's right. Sales imposed under an unconstitutional law is without the
authority of law and a threat to trade thus infringing Article 19 ( 1 ) (
g) of the Constitution of India ( i. e., "All citizens shall have the
right to practice any profession, or to carry on any occupation,
trade or business). The court, however, would not intervene and
strike down a t axing s t a tu t e merely on the ground that the t
axes would come large scale eroding of the profits. particularly
w h e r e a t a x i s c o m p e n s a t o r y, it cannot o p e r a t e a s a n
unreasonable restriction on the right to carry on business. Even
where the tax is not compensatory, a taxing statute cannot be struck
down as offending Article 19 ( 1 )( g) of the Constitution of India
unless there is an i m m i n e n t t h r e a t t o o r i m m e d i a t e b u r d e n o
n t h e t a r r y i n g o n o f t h e business or a trade which becomes
unreasonable in the circumstances.
ARTIC LE 27 OF THE C ON S TI TU TI ON OF I ND I A . To
maintain the secular character of the Indian Nation, Constitution, no
doubt, guarantees freedom of religion, to group of Individuals.
However, any tax which has gone into the public fund cannot be
utilised for promoting or maintaining any particular religion.
Article 27 o f t h e Constitution o f Indi a l a y s d o w n t hat "No person
shall be compelled to pay any taxes, the proceeds of which are specifically

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Notes by Praveen B S

appropriated in payment of expenses for the promotion or

maintenance of any particular religion or religious denomination."
A fee can be levied to meet the expenses of Governmental
supervision over the administration of religious endowments but
the State cannot levy a tax as there is no such entry in List II and
List III . Only Parliament can levy such a t ax and the States can
levy only a fee. Art. 27 of the Constitution of India will not
invalidate the levy of a fee by a State because the object of such a
levy is not to support or preserve any particular religion but to provide
a secular administration to religious institutions.

6.Explain the provisions relating to immunity of state agencies from tax.

(Mar 21) 10Marks

INTRODUCTION:
Intergovernmental tax immunity is a legal principle that ensures the
sovereignty of the federal and state governments. This principle represents a
constitutional check on the powers of both the federal and state governments
to levy taxes on each other. For example, state governments may not tax land
that the federal government owns, such as post offices and national parks. On
the other hand, the federal government may not enact a special tax on the
incomes of state employees.

The scope of the Inter-governmental tax immunities in India is very restricted.

Such immunities are dealt with mainly in Articles 285, 287, 288 and 289. The
Indian Constitution does not import the broad and general doctrine of
immunity of instrumentalities as understood in the United States beyond what
can be derived from these constitutional provisions.

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Notes by Praveen B S

EXEMPTION OF PROPERTY OF THE UNION FROM STATE

TAXATION IN INDIA

Article 285 of the Indian Constitution deals with the immunity granted to
the Union property from State taxation in India. Clause 1 of the Article
says that the property of the Union shall be exempted from all taxes
imposed by a State or by any authority within a State so long the Parliament
does not make any law otherwise.
Related case-
Union of India v. City Municipal Council, AIR 2000 Kant 104.
In this case validity of Section 94 of the Karnataka Municipalities Act was
questioned which authorized municipal authorities to levy tax in respect of
land and buildings situated within its area. A circular was issued to levy tax
on property belonging to Central Government if the same was used for
residential purposes. It was discussed in the case that Article 285 of the
Constitution of India provides the circumstances under which the tax could
be levied and it is the power which the Parliament may confer on the
State Government to levy the tax then only the power of legislation for
levy of tax could be exercised. Unless there is enactment by the Parliament,
conferring such a power on the State Government or the Municipal
Authority, the power to levy the tax cannot be exercised. Since no such
enactment had been made here, therefore the levy of tax was declared as
ultra vires of the Article 285 of the Constitution.

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Notes by Praveen B S

ARTICLE 287 AND 288:EXEMPTION FROM STATE TAXES ON

WATER AND ELECTRICITY CONSUMED BY GOVERNMENT
OF INDIA

Articles 287 and 288 constitute a partial importation of the doctrine

of immunity of instrumentalities in relation to the Union. They ensure
immunity of certain functions carried on by the Union, as distinguished
from property.

Article 287 lays down that except in so far as Parliament may by law
otherwise provide, a State cannot impose a tax on the consumption by or
sale of electricity (whether produced by government or any other person)
to, the Government of India; or electricity consumed in the construction,
maintenance or operation of a railway by the government of India or a
railway company.

Entry 53 and 54 empowers the State government to impose “tax on

consumption or sale of electricity” and “tax on the sale and purchase of
goods other than newspapers.” Entry 53 and 54 are to be read together to
treat electricity as a good and for the sale of electricity for consumption in
outside State, for Entry 53 is limited to consumption of electricity within
the State and not beyond its territory. Railways and Inter-state River and
river valleys are Union subject under Entries 22 and 56 of List I
respectively.

Article 287 further provides that even when Parliament authorises the
imposition of such a tax, the law imposing or authorising it should ensure
that the price of electricity sold to the Government of India for
consumption by it or to Railway Company, is less by the “amount of the
tax” than the price charged by the other consumers of a substantial quantity
of electricity. This means that the incidence of tax is to be on the producer
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Notes by Praveen B S

of electricity and not on the Government of India or the Railway Company.

Article 288 provides that a State may by certain law impose a tax in
respect of any water or electricity stored, generated, consumed or
distributed or sold by any authority established by law of Parliament for
regulating or developing any inter-state river or river valley. However, to
make such law be effective the law should receive Presidential assent and
consideration. The presidential assent ensures that the State legislation
does not injure interstate interests by imposing unduly high taxation on
generation, storage etc. of electricity. Presidential assent is a condition
precedent for the validity of the State legislation imposing tax under
Article 288 which serves a beneficial interest by way of protection of inter-
governmental interests.
This provision is in respect of water or electricity generated, consumed,
distributed or sold by any authority established for regulating or developing
any inter-state river or river valley. The purpose of these provisions is to
protect the public utility services like railways and river valley projects from
indiscriminate State taxation as these services have a national importance.

ARTICLE 289:EXEMPTION OF PROPERTY AND INCOME OF A

STATE FROM UNION TAXATION

State property and income under Article 289(1) is exempted from

Union taxation, whether the income derived by a State is from
governmental, non-governmental or commercial activities. Then Article
289(2) creates an exception to 289(1), by providing that Centre is
authorised to impose a tax in respect of the income derived from trade or
business carried on by it, or on its behalf which can be done by Parliament
making a law. This is where Article 289 differs mainly from Article 285,
where in Art.285 there is no distinction made between properties used for

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Notes by Praveen B S

governmental or commercial functions, but in the present Article, property

used for commercial function and income derived out of it is not immune
to Union taxation. Parliament can specify the trading activities of the State
Government making them liable to Union taxation in order to avoid
difficulty as to distinguish between governmental and commercial
functions of the State.

7.Distinction between Tax and Fees. (Mar 21)(Apr 22) 6 Marks

OR
8.Explain the meaning and essentials at tax and distinguish it from fees
and cess? (Oct 21)
Distinguish between Tax and Fee:
A government has several means of raising revenue in order to allow it
to function. Among the two most popular methods of raising revenue are to
impose taxes and fees on various activities. Generally, taxes are applied to
various transactions, often as a percentage, as a means of raising revenue or,
in some cases, as a means of incentivizing behavior. Fees, unlike taxes,
are directly linked to the cost of providing a service.

Tax Fee
Tax is the compulsory payment to the Fee is the voluntary payment for
government without getting any getting service
direct benefits
If the element of revenue for generalWhile a fee is for payment of a
purpose of the State predominates, specific benefit or privilege although
the levy becomes a tax the special to the primary purpose of
regulation in public interest
If tax is imposed on a person he has On the other hand, fee is not paid if
to pay it, otherwise he has to be the person does not want to get the
panelized service
No element of quid pro quo (tax There is quid pro quo (the fee payer
payer will not get direct benefit) will get direct benefit )
Tax are routed to consolidated fund It is not so.

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Notes by Praveen B S

Ultimate object is the welfare of the It is regulation of society.

state
Tax is a common burden It is a specific burden

Taxes change according to policy of Fee is uniform,

Government and capacity of payer.
Examples: Income tax, GST Example: Stamp Fee, Driving
license fee, Toll fee,

Difference between fee and cess

Cess is imposed as an additional tax besides the existing tax whereas
surcharge is a tax on tax, with the purpose of raising the funds for a specific
purpose. For example, the Swachh Bharat cess is levied by the government for
the various cleanliness initiatives under Swachh Bharat Mission.

It is one of the means for the Union government to raise revenue apart
from other forms of taxes, fees, etc. Broadly, the following are the differences
between Cess and Tax.

The term ‘Cess’ finds reference in two separate articles of the

Constitution. Article 270 (1) & 277. In the latter i.e. Article 277, the reference
is to the continuation of taxes, fees, cess, etc. which are already levied prior to
the Indian constitution coming into effect.

Article 270 (1) on the other hand mentions that various taxes form part
of the divisible pool, whose proceeds are distributed between Union & States.
It further highlights that any ‘cess’ levied for ‘specific purposes’ under any
law passed by the Parliament is an exception i.e., they are not part of the
divisible pool.

The term ‘specific purpose’ is considered as the key to the idea of

imposing any cess. It ought to be noted that the current form of Article 270
with the special mention of Cess being an exception is after the Eightieth
Constitutional Amendment Act made in 2000. This Amendment Act gave the

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Notes by Praveen B S

constitutional sanction to the earlier practice of keeping cess taxes and

surcharges outside the divisible pool.

a) Write a note on compensatory tax. (Dec 19)

9.Write a note on the difference between tax evasion and tax avoidance.
(Dec 19) (Mar 21)(Apr 22) 6 Marks

Tax Evasion: Tax Evasion is an illegal way to minimize tax liability

through fraudulent techniques like deliberate under-statement of taxable
income or inflating expenses. It is an unlawful attempt to reduce one’s tax
burden. Tax Evasion is done with a motive of showing fewer profits in order
to avoid tax burden. It involves illegal practices such as making false
statements, hiding relevant documents, not maintaining complete records of
the transactions, concealment of income, overstatement of tax credit or
presenting personal expenses as business expenses. Tax evasion is a crime
for which the assesse could be punished under the law.

Tax Avoidance: Tax avoidance is an act of using legal methods to

minimize tax liability. In other words, it is an act of using tax regime in a
single territory for one’s personal benefits to decrease one’s tax burden.
Although Tax avoidance is a legal method, it is not advisable as it could be
used for one’s own advantage to reduce the amount of tax that is payable.
Tax avoidance is an activity of taking unfair advantage of the shortcomings
in the tax rules by finding new ways to avoid the payment of taxes that are

21
Notes by Praveen B S

within the limits of the law. Tax avoidance can be done by adjusting the
accounts in such a manner that there will be no violation of tax rules. Tax
avoidance is lawful but in some cases it could come in the category of crime.
THE DIFFERENCE BETWEEN ‘TAX AVOIDACNE’ AND ‘TAX
EVASION’

TAX AVOIDANCE TAX EVASION

(i) Where the payment of tax is
avoided though by complying with Where the payment of tax is avoided
the provisions of law but defeating through illegal means or fraud is termed
the intension of the law is known as tax evasion.
as tax Avoidance.

(ii) Tax Avoidance is undertaken

Tax evasion is undertaken by employing
by taking advantage of loop holes
unfair means
in law

(iii) Tax Avoidance is done

Tax Evasion is an unlawful way of
through not malafied intention but
paying tax and defaulter may punished.
complying the provision of law.
(iv) Tax Avoidance looks like a
Tax evasion is blatant fraud and is done
tax planning and is done before the
after the tax liability has arisen.
tax liability arises.

UNIT II
22
Notes by Praveen B S

1. Discuss the principles relating to determination of residential status

under the I-T Act, 1961,(Mar 21) 10 Marks
Introduction: The Income Tax Department must determine the residential
status of tax payers, regardless of whether they are individuals or companies.
This information becomes pertinent during tax filing season. This is actually
one of the main factors that determine a person’s taxability. Meaning and
importance of residential status Taxability of an individual is dependent on his
Indian residential status for a particular financial year. Indian income tax laws
explain what the term residential status means. Both citizenship and residential
status are distinct aspects. A person may be Indian citizen, but it does not
necessarily mean that they must be resident in India for a specific year. Section
6 of Income-tax Act 1961 (the Act), contains provisions that relate to
determination Residency of a person.

Types of Taxable Entities

 Residential status of an Individual
 Residential Status of HUF
 Residential Status of a Firm of Association or Persons (AOP)
 Residential Status of Company

Residential Status of An Individual

1. A resident
2. A resident not ordinarily resident (RNOR)
3. A non-resident (NR)

The taxability differs for each of the above categories of taxpayers. Before we
get into taxability, let us first understand how a taxpayer becomes a resident,
an RNOR or an NR.

Resident

23
Notes by Praveen B S

A taxpayer would qualify as a resident of India if he satisfies one of the

following 2 conditions :

1. Stay in India for a year is 182 days or more or

2. Stay in India for the immediately 4 preceding years is 365 days or more and
60 days or more in the relevant financial year

In the event an individual who is a citizen of India or person of Indian

origin leaves India for employment during an FY(Financial Year), he will
qualify as a resident of India only if he stays in India for 182 days or more.
Such individuals are allowed a longer time greater than 60 days and less than
182 days to stay in India. However, from the financial year 2020-21, the period
is reduced to 120 days or more for such an individual whose total income
(other than foreign sources) exceeds Rs 15 lakh.

In another significant amendment from FY 2021-22, an individual who

is a citizen of India who is not liable to tax in any other country will be deemed
to be a resident in India. The condition for deemed residential status applies
only if the total income (other than foreign sources) exceeds Rs 15 lakh and
nil tax liability in other countries or territories by reason of his domicile or
residence or any other criteria of similar nature.

Resident Not Ordinarily Resident

If an individual qualifies as a resident, the next step is to determine if he/she
is a Resident ordinarily resident (ROR) or an RNOR. He will be a ROR if he
meets both of the following conditions:

1. Has been a resident of India in at least 2 out of 10 years immediately

previous years and

24
Notes by Praveen B S

2. Has stayed in India for at least 730 days in 7 immediately preceding years

Therefore, if any individual fails to satisfy even one of the above conditions,
he would be an RNOR.

Non-resident

An individual satisfying neither of the conditions stated in (a) or (b) above

would be an NR for the year.
Taxability
Resident: A resident will be charged to tax in India on his global income i.e.
income earned in India as well as income earned outside India.
NR and RNOR: Their tax liability in India is restricted to the income they earn
in India. They need not pay any tax in India on their foreign income. Also note
that in a case of double taxation of income where the same income is getting
taxed in India as well as abroad, one may resort to the Double Taxation
Avoidance Agreement (DTAA) that India would have entered into with the
other country in order to eliminate the possibility of paying taxes twice.

Residential Status Of HUF

A Hindu Undivided Family (HUF) is said to be resident in India if the
control and management of its affairs are wholly or partly situated in India.
A resident HUF is treated as Resident and ordinarily resident in India if
the Karta (inclusive successive Karta) satisfies both of the following
conditions-
(i) he has been resident in India in at least 2 out of 10 years immediately
preceding the relevant year
(ii) he has been in India for a period of 730 days or more during 7 years
immediately preceding the relevant year.

25
Notes by Praveen B S

If Karta doesn’t satisfies any of the above conditions then HUF is treated as
Resident but not ordinarily resident.
If HUF’s control and management is situated wholly outside India then it is
treated as non resident.
Residential Status Of A Firm Or Association Of Persons (AOP)
A partnership firm or association of persons is said to be resident in
India if then control and management of its affairs wholly or partly situated
within India during the relevant previous year. It is however treated as non
resident in India if the control and management of its affairs are situated
wholly outside India.
Residential Status Of Company
An Indian company is always resident in India.
Residential status of foreign company from Assessment year 2016-17.
A foreign company will be resident in India if its place of effective
management (POEM) during the relevant previous year is in India. For this
purpose, the place of effective management means a place where key
management and commercial decisions that are necessary for the conduct of
the business of an entity as a whole are in substance made. For this purpose a
set of guiding principles to be followed in determination of POEM may be
issued by the Board of the benefit of the taxpayers as well as tax
administration.

2. Explain the meaning of salary and various deduction of salary.

Meaning of Salaries?(Mar 21)(Dec 19) 10 Marks
OR
Define salary and discuss the mode of computation of tax liability of
salary income.

26
Notes by Praveen B S

Salary income refers to the compensation received by an employee

from a current or former employer for the execution of services in
connection with employment. Thus, income is taxable as salary under
Section 15 only if an employer-employee relationship exists between the
payer and payee. Salary income could be in any form such as gift, pension,
gratuity, usual remuneration and so on. In this article, we look at various
aspects of salary income under the Income Tax Act.
Meaning of Salary under Income Tax Act (Sec 15 to 17)
As per Section 17(1), Salary includes –
 Wages,
 any annuity or pension,
 any gratuity,
 Any fees, commissions, perquisites or profits in lieu of or in
addition to any salary or wages,
 any advance of salary,
 The payment received by an employee in respect of any period
of leave not availed of by him.
 The annual accretion to the balance at the credit of an employee
participating in a recognized provident fund, to the extent to
which it is chargeable to tax under part A of the Fourth
schedule.
 The aggregate of all sums that are comprised in the transferred
balance as referred to in sub-rule (2) of rule 11 of part A of the
fourth Schedule of an employee participating in a recognized
provident fund, to the extent to which it is chargeable to tax
under sub-rule (4) thereof, and
 The contribution made by the Central Government or any other
employer in the previous year, to the account of an employee
under a pension scheme referred to in Section 80-CCD.

Employer-Employee Relationship.
There must be employer and employee relationship, either in the
present or in the past, between the person liable to pay the amount and the
person entitled to receive the amount. If such a relationship does not exist,
then the income falls outside the scope of the head “salaries”.

27
Notes by Praveen B S

If a person is acting as an agent for his principal during the course of

his carrying on of business, there is no relationship between them as master
and servant and thereof, any commission or remuneration earned by the
agent is chargeable to tax under profits and gain of business or profession
but not under salaries.
Year of Chargeability.
Salary is chargeable to tax either on due basis or on receipt whichever
is earlier. Salary due in previous year is taxable whether it is received or not
during that previous year. Salary received in advance during the previous
year is taxable even if it is not due. Similarly, arrears of salary received
during the previous year is taxable if it was not taxed in earlier years. Where
any salary paid in advance is included again when it becomes due.
Place of Accrual.
Normally, the place of accrual of salary is the place where the services
are rendered. Therefore, even if a non-resident is paid salary outside India in
respect of services rendered in India, it is deemed to accrue or arise in India
by virtue of section9.
Various deductions from Salaries.
The in come chargeable under the head Salaries is computed after
making the following
Deductions-
(i). Entertainment Allowance (Section16(ii)
. Entertainment allowance is not eligible for exemption but it only
qualifies for deduction. Therefore, entertainment allowance is first included
in gross salary and then deduction is allowed under section16(ii).
In the case of Government employee, the least of (a) Rs. 5,000, (b) 20
per cent of salary, or (c) amount of entertainment allowance granted during
the previous year, is deducted able.
(ii). Professional Tax.

In case the profession tax is paid by the employer or on behalf of the

employee, the amount so paid should be included in gross salary as a
perquisite and then deduction under section 16(iii) can be claimed. Now the
Profession tax is 2400Rs per annum.

28
Notes by Praveen B S

Standard Deduction:

The standard deduction was introduced for salaried taxpayers under Section
16 of the Income Tax Act. It allows salaried individuals to claim a flat
deduction from income irrespective of actual expenses incurred by the
employees. It has been introduced to bring parity between salaried
employees and self-employed individuals.

The eligible amount for this deduction cannot exceed the salary amount. The
maximum amount of deduction will be: INR 50,000/- or Salary amount
whichever is lower.

Section 80C, 80CCD (1), and 80CCC

There are tax savings options wherein salaried employees can invest and
claim an income tax deduction on salary up to Rs. 1.5 lacs. Some of the
investments covered under the sections mentioned above include Employee
Provident Fund (EPF), Life Insurance Premium, Equity Linked Savings
Scheme (ELSS), Pension schemes, etc. There are also many other
government savings schemes included under these section

Deductions Against Loans

The principal and interest paid towards the home loan are eligible for
deduction under section 80E subject to a maximum limit of Rs. 1.50 lacs.
Employees can claim deductions for interest paid on home loans for up to
Rs. 2.0 lacs under section 24.

29
Notes by Praveen B S

Conclusion.

This is the relationship of Employer and Employee, whatever the

money paid by the employer to the employee for his work is called salary
and the various deductions from the salary is mentioned above.

3.Explain the provisions relating to ‘income from house property’ under

the IT Act, 1961? (Dec 18) 10 Marks
OR
4.Draw a format of income form house property under the IT Act, 1961?
(Oct 21) 6 Marks

Introduction:

INCOME FROM HOUSE PROPERTY is dealt under the following

sections (SEC 22 TO 27);

30
Notes by Praveen B S

 Sec 22 & 23 – Income taxable under the head and how it is calculated
 Section 24 – Deductions Allowed
 Section 25 – Deductions which are not allowed and taxable
 Section 26 – Special treatment in case of co – owners of the house.
 Section 27 – Various Terms for this head of income.

Meaning: The annual value of a property, consisting of any buildings or lands

appurtenant thereto, of which the assessee is the owner, is chargeable to tax
under the head ‘Income from house property’.

Meaning of building/s: Buildings or lands appurtenant thereto The term

‘building’ includes residential houses, bungalows, office buildings,
warehouses, docks, factory buildings, music halls, lecture halls, auditorium
etc. The appurtenant lands in respect of a residential building may be in the
form of approach roads to and from public streets.

However, if a house property, or any portion thereof, is occupied by the

assessee, for the purpose of any business or profession, carried on by him, the
profits of which are chargeable to income-tax, the value of such property is
not chargeable to tax under this head.

Rental income from a vacant plot of land (not appurtenant to a building) is not
chargeable to tax under the head ‘Income from house property’, but is taxable
either under the head ‘Profits and gains of business or profession’ or under the
head ‘Income from other sources’, as the case may be. • However, if there is
land appurtenant to a house property, and it is let out along with the house
property, the income arising from it is taxable under this head.

CONDITIONS FOR INCOME FROM HOUSE PROPERTY:

Three conditions are to be satisfied for property income to be taxable under
this head.
31
Notes by Praveen B S

1. The property should consist of buildings or lands appurtenant thereto.

2. The assessee should be the owner of the property.
3. The property should not be used by the owner for the purpose of any
business or profession carried on by him, the profits of which are
chargeable to income-tax.

OWNERSHIPOF HOUSE PROPERTY: It is only the owner (or deemed

owner) of house property who is liable to tax on income under this head.
Owner may be an individual, firm, company, cooperative society or
association of persons.

DEEMED OWNER Section 27 of the Income Tax Act provides that, in

certain circumstances, persons who are not legal owners are to be treated as
deemed owners of house property for the purpose of tax liability under this
head.

1. If an individual transfers a house property to his or her spouse (except in

connection with an agreement to live apart) or to a minor child (except a
married daughter) without adequate consideration, he is deemed as the owner
of the property for tax purposes. However, if an individual transfers cash to
his or her spouse or minor child, and the transferee acquires a house property
out of the gifted amount, the transferor shall not be treated as the deemed
owner of the house property.

2. The holder of an Impartible Estate is deemed to be the owner of all the

properties comprised in the estate.

3. A member of a co-operative society, company or association of persons, to

whom a property (or a part thereof) is allotted or leased under a house building
scheme of the society, company or association, is deemed to be the owner of
such property.

32
Notes by Praveen B S

4. A person who has acquired a property under a power of attorney

transaction, by satisfying the conditions of section 53A of the Transfer of
Property Act, that is under a written agreement

5. A person who has acquired a right in a building by way of a lease for a term
of not less than 12 years

PROPERTY INCOME EXEMPTED FROM TAX:

 Income from a farm house.

 Annual value of one palace in the occupation of an ex-ruler.
 Property income of a local authority.
 Property income of an approved scientific research association.
 Property income of an educational institution and hospital.
 Property income of a registered trade union.
 Income from property held for charitable purposes.
 Property income of a political party.
 Income from property used for own business or profession.
 Annual value of oneself occupied property.

DETERMINATION OF ANNUAL VALUE

The annual value of house property has been defined as 'the amount for
which the property may reasonably be expected to be let out for a year'.
However, if your property is let out for the whole or a part of the financial
year, the gross annual value will be the amount received during the year as
a result of the letting out of the house property. This shall also exclude the
rent that the taxpayer is unable to realize in the financial year.

The following four factors have to be taken into consideration while

determining the Gross Annual Value of the property: 1. Rent payable by the

33
Notes by Praveen B S

tenant (actual rent) 76 2. Municipal valuation of the property. 3. Fair rental

value (market value of a similar property in the same area). 4. Standard rent
payable under the Rent Control Act.

If the property is let out but remains vacant during any part or whole of the
year and due to such vacancy, the rent received is less than the reasonable
expected rent, such lesser amount shall be the Annual value. • For the purpose
of determining the Annual value, the actual rent shall not include the rent
which cannot be realized by the owner.

DEDUCTIONS U/S SEC 24:

Standard Deduction: 30 % of the adjusted annual value is deductible

irrespective of expenses incurred by the taxpayer

Interest on Borrowed Capital: Interest on Borrowed capital is allowed as

deduction if capital is borrowed for the purpose of purchase, construction,
repair, renewal or reconstruction of the property. It is deductible on accrual
basis. It can be deductible as yearly, it is deductible even if it is not actually
paid during the previous year No deduction for any brokerage or any expenses
for arranging the loan is allowed interest of a fresh loan taken for the
repayment of the earlier loan is allowed as deduction

DEDUCTIONS WHICH ARE TAXABLE (U/S 25):

Any interest chargeable under the Act, payable out of India on which
tax has not been paid or deducted at source, and in respect of which there is
no person in India who may be treated as an agent, is not deductible, by virtue
of Section 25, in computing income chargeable under the head “Income from
house property”.

34
Notes by Praveen B S

Thus, the interest payable outside India, will not be allowable as deductions if
No tax is paid thereon or No tax is deducted at source there from or There is
no person in India who is liable to pay tax thereon as agent

PROPERTY OWNED BY CO – OWNER (SEC 26):

When it is applicable a house property is owned by two or more persons

(co – owners) their share in the property and its income is definite and
ascertainable as per the agreement between them.

Procedure in case of co – owners Determine the income of the whole

house property Divide the income between the co-owners according to the
shares Include the share of each co-owner in other incomes of each of them
to find his total income. Tax the co-owner accordingly.

Conclusion:

Therefore, for an income to be taxed under the head income from house
property, the above provisions should be applied.

35
Notes by Praveen B S

5.What is meant by capital gain? When it will be termed as short-term

and long-term capital gain?(Dec 21)(Nov 20)

OR

6. Give a Format determining the taxable income from capital gains.(Oct

21) 6 Marks

Capital gain is denoted as the net profit that an investor makes after
selling a capital asset exceeding the price of purchase. The entire value
earned from selling a capital asset is considered as taxable income. To be
eligible for taxation during a financial year, the transfer of a capital asset
should take place in the previous fiscal year.

Buildings, lands, houses, vehicles, Mutual Funds, and jewellery are a

few examples of capital assets. Also, the rights of management or legal
rights over any company can be considered as capital assets.

The following are not included under capital assets –

 Any stock, consumables or raw materials that are held for the purpose
of business or profession.
 Goods such as clothes or furniture that are held for personal use.
 Land for agriculture in any part of rural India.
 Special bearer bonds that were issued in 1991.
 Gold bonuses issued by the Central Government such as the 6.5%
gold bonus of 1977, 7% gold bonus of 1980 and defense gold bonus of
1980.
 Gold deposit bonds that were issued under the gold deposit scheme
(1999) or the deposit certificates that were issued under the Gold
Monetisation Scheme (2015).
Types of Capital Gain

Depending on the tenure of holding an asset, gains against an investment can

be broadly divided into the following types –
36
Notes by Praveen B S

 Short term capital gain

If an asset is sold within 36 months of acquisition, then the profits earned

from it is known as short term capital gains. For instance, if a property is
sold within 27 months of purchase, it will come under short term capital
gains. However, tenure varies in the case of different assets. For Mutual
Funds and listed shares, Long term capital gain happens if an asset is sold
after holding back for 1 year.

 Long term capital gain

The profit earned by selling an asset that is in holding for more than 36
months is known as long-term capital gains. After 31st March 2017, a
holding period for non-moveable properties was changed to 24 months.
However, it is not applicable in case of movable assets such as jewellery,
debt-oriented Mutual Funds, etc.

Furthermore, a few assets are considered as short-term capital assets if the

holding period is less than 12 months. Here is a list of assets that are
considered according to the rule mentioned above –

 Equity shares of any organization listed on a recognized Indian stock

exchange.
 Securities like bonds, debentures, etc. that are listed on any Indian
stock exchange.
 UTI units, regardless of being quoted or unquoted.
 Capital gain on Mutual Funds that are equity-oriented, whether they
are quoted or not.
 Zero-coupon bonds.

All the assets mentioned above are considered as long-term capital assets if
they are held for 12 months or more. In case of any asset acquired by
inheritance or gift, then the period for which an asset is owned by a previous
owner is considered. Furthermore, in the case of bonus shares or right shares,
the period of holding is considered from the date of allotment.
37
Notes by Praveen B S

Indexed Cost of Acquisition

The cost of acquisition is calculated on the present terms by applying

the CII (Cost Inflation Index). It is done to adjust the values by taking into
account the inflation that takes place over the years while holding the asset.

The indexed cost of acquisition can be estimated as the ratio of the Cost
Inflation Index (CII) of the year when an asset was sold by a seller and that
of the year when the property was acquired or the financial year 2001-2002,
whichever is later multiplied by the Cost of acquisition.

Suppose, a person acquired an asset at Rs. 50 Lakh in the financial year

2004-2005 and she decided to transfer the property in the fiscal year 2018-
19. The CII of the financial year 2004-05 and 2018-19 were 113 and 280
respectively.

Tax exemptions can be claimed under the following sections on the profit
earned against assets –

1. Section 54 –

If an amount earned by selling a residential property is invested to

purchase another property, then the capital gains earned by transferring the
ownership of a property is tax exempted. However, deductions can be
claimed only if the following conditions are met –

 Individuals are required to purchase a second property within 2 years

of sale or 1 year before transferring the ownership.
 In the case of an under-construction property, the purchase of a second
property should be completed within 3 years of transferring the
ownership of the first property.
 Newly acquired property cannot be sold within 3 years of purchase.
 The newly acquired property is required to be located in India.

2. Section 54F –

38
Notes by Praveen B S

Exemptions under Section 54F can be claimed when there are capital
gains earned from a long-term asset other than a residential property.
However, the exemption stands invalid if you sell the new asset within 3
years after purchasing or construction.

The purchase of a new property should be made within 2 years of earning the
capital. Also, in the case of construction, it has to be completed within 3
years from the date of sale.

3. Section 54EC –

Individuals can claim tax exemptions under Section 54EC if the capital gains
statements are submitted for investments into specific bonds with the amount
earned by selling a property.

The invested amount can be redeemed after 3 years from the date of sale, but
the bonds cannot be sold within the period. This period has been increased to
5 years with effect from the financial year 2018-19. Individuals are required
to invest in these special bonds within 6 months of a property sale.

Earing capital gains is much convenient with various beneficial investment

options in the market. Also, if reinvested correctly, tax incurred on capital
gains can be reduced ensuring higher savings.

7. Give a Format determining the taxable income from capital gains.(Oct

21)(6 Marks

Calculation of Capital Gains

The calculations of capital gains are dependent on the type of assets and their
holding period. A few terms that an individual must know before calculating
gains against their capital investments are here as follows –

 Full value consideration –

It is the consideration that is received by a seller in return for a capital asset.

39
Notes by Praveen B S

 Cost of acquisition –

The cost of acquisition is the value of an asset when a seller acquires it.

 Cost of improvement –

The cost of improvement is the amount of expenses incurred by a seller in

making any additions or alterations to a capital asset.

To calculate the value of short term capital gain, the full amount of
consideration is required to be determined at first. From the obtained value,
cost of acquisition, cost of improvement and the total expenditure incurred
concerning the transfer of ownership has to be deducted. This resultant value
will be the capital gain on investments.

8. What are the various authorities and explain their powers under
Income Tax Act, 1961? (Dec 21)

40
Notes by Praveen B S

Income tax authorities

According to section 116 of the Income Tax Act, there shall be the
following types of income tax authorities for the purposes of this Act . they
are as follows ;
(a) The Central Board of Direct Taxes.
(b) Directors-General of Income-tax or Chief Commissioners of Income-
tax.(CCIT)
(c) Directors of Income-tax or Commissioners of Income-tax or
Commissioner of Income-tax (Appeals).(CIT)
(d) Additional Directors of Income-tax, or Additional Commissioners of
Income-tax or Additional Commissioners of Income-tax (Appeals).(ACIT)
(e) Deputy Directors of Income-tax or Deputy Commissioners of Income-tax
or Deputy Commissioners of Income-tax (Appeals).
(f) Assistant Directors of Income-tax or Assistant Commissioners of Income-
tax.
(g) Income-tax Officers.
(h) Tax Recovery Officers.
(i) Inspector of Income-tax.
The authorities acting under the Income-tax Act have to act judicially and one
of the requirements of judicial action is to give a fair hearing to the person
before deciding against him. The taxing authorities exercise quasi-judicial
powers and in doing so they must act in a fair and not a partisan manner.
The Central Board of Direct Taxes (CBDT).
The Central Board of Direct Taxes was constituted under the Central
Board of Revenue Act, 1963. It works under the Ministry Finance. The
Central board of Direct Taxes may, by notification in the Official Gazette,
direct that any income- tax authority or authorities specified in the
notification shall be subordinate to such other income-tax authority or
authorities as may be specified in such notification.
Jurisdiction of Income Tax Authorities.

41
Notes by Praveen B S

Income-tax authorities shall exercise all or any of the powers and

person all or any of the functions conferred on them in accordance with the
directions issued by the Board or any other income-tax authority.
Any such directions or orders may be issued having regard to the
following criteria:-
(a). Territorial Area, e,g., Pin Code, Corporation division number.
(b). Persons or class of persons, e.g., Companies, Trusts.
(c). Income or class of income, e.g., salary income.
(d). Cases or class of cases, e.g., Professionals, contractors.
THE SCOPE OF EXERCISE OF THE POWERS GIVEN TO THE
INCOME-TAX AUTHORITIES:
The Income Tax Act, 1961 specifies the scope of the powers handed to the
income-tax authorities. Given below are some of the important powers of the
Income Tax Authorities and their scope as given in the Sections provided
under the Income Tax Act, 1961:

• Power to Transfer Cases [Section 127]:

CBDT can transfer the case from Assessing Officer to another A.O.
subordinate to him after giving a reasonable opportunity of being heard to
the concerned assessee. However, no opportunity of being heard shall be
required if the case is to be transferred from one A.O. to another A.O. within
the same city, town or locality.
 Opportunity of Being Reheard [Section 129]:
Whenever, an Income Tax Authority ceases to exercise jurisdiction
over a particular case and is being succeeded by another Income Tax
Authority, then the successor Income Tax Authority shall continue the
pending proceeding from the same stage at which it was left over by the
predecessor Income Tax Authority. There shall be no requirement on the part
of the successor Income Tax Authority to reissue any notice already issued
by his predecessor. However, if the concerned assessee demands that before
the successor Income Tax Authority continues the proceeding, he shall be
given an opportunity of being reheard to explain his case to the successor
Income Tax Authority, then in such case, an opportunity of being reheard
has to be given to the assessee.

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Notes by Praveen B S

• Discovery, Production of Evidence etc. [Section 131]:

The Assessing Officer, Deputy Commissioner (Appeals), Joint
Commissioner, Commissioner (Appeals), the Chief Commissioner and the
Dispute Resolution Panel referred to in section 144C have the powers vested
in a Civil Court under the Code of Civil Procedure, 1908 while dealing with
the following matters
(i) discovery and inspection;
(ii) enforcing the attendance of any person, including any officer of a
banking company and examining him on oath;
(iii) compelling the production of books of account and documents; and
(iv) issuing commissions

• Search and Seizure [Section 132]:

Today it is not hidden from income tax authorities that people evade
tax and keep unaccounted assets. When the prosecution fails to prevent tax
evasion, the department has to take actions like search and seizure. Under
this section, wide powers of search and seizure are conferred on the income-
tax authorities.
• Power to Requisition Books of Account etc. [Section 132A]:
Where the Director or the Director-General or Commissioner or the
Chief Commissioner in consequence of information in his possession, has
reason to believe that (a), (b), or (c) as mentioned under section 132(1) and
the book of accounts or other documents or the assets have been taken under
custody by any authority or officer under any other law, then Income tax
Officer to require the authority to provide sue books of account, assets or any
documents to the requisitioning officer, when such officer is of the opinion
that it is no longer necessary to retain the same in his custody.

• Application of Retained Assets [Section 132B]:

This section provides that the seized assets can be appropriated against all
tax liabilities of the assessee. However, if the nature of source of acquisition
of seized assets is explained satisfactorily by the assessee, then, such assets

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Notes by Praveen B S

are required to be released within a period of 120 days from the date on
which last of the authorisations for search under section 132 is executed after
meeting any existing liabilities.
• Power to call for information [Sections 133]:
The Commissioner the Assessing Officer or the Joint
Commissioner may for the purpose of this Act:
(a) Can call any firm to provide him with a return of the addresses and
names of partners of the firm and their shares;
(b) Can ask any Hindu Undivided Family to provide him with return of
the addresses and names of members of the family and the manager;
(c) Can ask any person who is a trustee, guardian or an agent to deliver
him with return of the names of persons for or of whom he is an agent,
trustee or guardian and their addresses;
(d) Can ask any person, dealer, agent or broker concerned in the
management of stock or any commodity exchange to provide a statement of
the addresses and names of all the persons to whom the Exchange or he has
paid any sum related with the transfer of assets or the exchange has received
any such sum with the particulars of all such payments and receipts;

• Power of Survey [Section 133A]:

The term 'survey' is not defined by the Income Tax Act. According to the
meaning of dictionary 'survey' means casting of eyes or mind over
something, inspection of something, etc. An Income Tax authority can have
a survey for the purpose of this Act. The objectives of conducting Income
Tax surveys are:
(a) To discover new assessees;
(b) To collect useful information for the purpose of assessment;
(c) To verify that the assessee who claims not to maintain any books of
accounts is in-fact maintaining the books; (d)To check whether the books are
maintained, reflect the correct state of affairs.

• Power to Collect Certain Information [Section 133B]:

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Notes by Praveen B S

For the purpose of collection of information which may be useful for any
purpose, the Income tax authority
can enter any building or place within the limits of the area assigned to such
authority, or any place or building occupied by any person in respect of
whom he exercises jurisdiction.

• Power to Inspect Registers of Companies [Section 134]:

The Assessing Officer, the Joint Commissioner or the Commissioner
(Appeals), or any person subordinate to
him authorised in writing in this behalf by the Assessing Officer, the Joint
Commissioner or the Commissioner (Appeals), as the case may be, may
inspect and if necessary, take copies, or cause copies to be taken, of any
register of the members, debenture holders or mortgagees of any company or
of any entry in such register.

• Other Powers [Sections 135 and 136]:

The Director General or Director, the Chief Commissioner or Commissioner
and the Joint Commissioner are
competent to make any enquiry under this act and for all purposes they shall
have the powers vested in an Assessing Officer in relation to the making of
enquiries. If the Investigating officer is denied entry into the premises, the
Assessing Officer shall have all the powers vested in him under sections
131(1) and (2). All the proceedings before Income tax authorities are judicial
proceedings for purposes of section 196 of the Indian Penal Code, 1860, and
fall within the meaning of sections 193 and 228 of the Code. An income-tax
authority shall be deemed to be a Civil Court for the purposes of section 195
of the Criminal Procedure Code, 1973.
Conclusion.
Under the Income-tax authority there are so many Officers appointed
by the Government in many designations and there is a hierarchy of the
superiority of the officers. according to the rank of the officer from
Director-General to Inspector, according to the designation the power and
function are divided as mentioned above.

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Notes by Praveen B S

9. Write a note on Agricultural income. (Dec 19)

Agricultural income refers to the income earned or revenue generated

from sources essentially premised on agricultural activities. These sources of
income include farming land, buildings on or identified with agricultural land
as well as commercial produce from a horticultural land.
Section 2(1A) of the Income Tax Act, 1961, lays down the definition of
‘agricultural income’ under the following three activities:

 Rent or revenue derived from agricultural land situated in India and

used for agricultural purposes.
 Income earned from agricultural land through the commercial sale of
produce gained from this land.
 Revenue derived from renting or leasing of buildings in or around
agricultural land. However, this criterion is subject to the following
conditions:
 This building should be occupied by a farmer or cultivator through
revenue or rent.
 It is used as a residential space, warehouse/storeroom, or outhouse.
 The land on which this building is located is assessed for land revenue
or a local rate evaluated and collected by government officers.
 To consider as an Agriculture income the following thongs should be
there:
 There must exist an agricultural land

Saving Tax on Sale of Agricultural Land under section 54B

• In some cases, capital gains made from the sale of agricultural land may
be entirely exempt from income tax or it may not be taxed under the head
capital gains.

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Notes by Praveen B S

a. Agricultural land in a rural area in India is not considered a capital asset and
therefore any gains from its sale are not chargeable to tax. For details on what
defines an agricultural land in a rural area, see above.

b. Do you hold agricultural land as stock-in-trade? If you are into buying and
selling land regularly or in the course of your business, in such a case, any
gains from its sale are taxable under the head Business and Profession.

c. Capital gains on compensation received for compulsory acquisition of urban

agricultural land are tax exempt under Section 10(37) of the Income Tax Act.

If your agricultural land wasn’t sold in any of these cases, you can seek
exemption under Section 54B.

Section 54B: Exemption on Capital Gains From Transfer of Land Used

for Agricultural Purpose

When you make short-term or long-term capital gains from transfer of land
used for agricultural purposes – by an individual or the individual’s parents or
Hindu Undivided Family (HUF) – for 2 years before the sale, exemption is
available under Section 54B. The exempted amount is for the investment in a
new asset or capital gain, whichever is lower. You must reinvest into a new
agricultural land within 2 years from the date of transfer.

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